Gold price remains on tenterhooks as US economic remains resilient

Gold price hovers around $1,900.00 as investors await Fed minutes.
The US Dollar capitalizes on US economic resilience and a slowdown in China.
Robust consumer spending momentum driven by strong wage growth may keep US core inflation sticky.

Sagar Dua FXStreet

Gold price (XAU/USD) flirts with the crucial support of $1,900 as investors await the Federal Open Market Committee (FOMC) minutes to attain guidance about inflation and the interest-rate peak. The precious metal continues to find offers from market participants as the US Dollar and Treasury yields strengthen due to the resilience of the US economy, which contrasts with China’s poor economic outlook.

Robust consumer spending momentum fueled by strong wage growth indicates resilience in the US economy, which could keep core inflation sticky and would force Federal Reserve (Fed) policymakers to keep interest rates high for a longer period. Fed policymakers are expected to keep the interest-rate policy unchanged in September as spending on big-ticket items softens due to higher rental costs.

Daily Digest Market Movers: Gold price seems misguided, FOMC minutes eyed

Gold price aims for sustainability above $1,900, aided by a directionless US Dollar ahead of the FOMC minutes, which will be released at 18:00 GMT.
FOMC minutes of the September monetary policy meeting will provide interest rate guidance and the inflation outlook for the remainder of 2023.
According to the CME Group FedWatch Tool, markets broadly expect interest rates to remain unchanged for the rest of the year.
However, US economic resilience due to stronger consumer spending momentum and tight labor market conditions could force Federal Reserve policymakers to keep interest rates high for a longer period.
On the contrary, Minneapolis Fed President Neel Kashkari said on Tuesday that while the US central bank has made some progress in its inflation fight, interest rates may still need to go higher to finish the job.
The US Dollar Index manages to keep the auction around 103.00 amid further evidence of an economic slowdown in China and US strong consumer spending momentum.
The Chinese economy is facing a turbulent environment amid a slowdown in overall demand and declining exports.
The People’s Bank of China (PBoC) cut the one-year medium-term lending facility (MLF) rate by 15 basis points (bps) to 2.50% in order to keep liquidity in the banking system at reasonably ample levels.
A dovish interest-rate decision from the PBoC came after new home prices in China fell in June for the first time this year.
An economic slowdown of the Chinese economy has improved the appeal for the US Dollar.
US retail sales, a proxy for consumer spending, expanded at a higher pace in July partly driven by strong wage growth. Retail Sales rose by 0.7%, more than the 0.4% expected and the 0.2% increase seen a month earlier. Retail Sales excluding automobiles rose by 1.0%, indicating robust demand for both durables and quick consumables.
10-year US Treasury yields remain around 4.20% as investors hope interest rates will remain high for longer amid an upbeat economic outlook.
The risk profile remained bearish as Fitch warned about the downgrading of some of the big US lenders. After the downgrade of the US banking industry's "operating environment" to AA- from AA, the credit rating firm warned of downgrading multiple banks including J.P. Morgan.
Apart from the FOMC minutes, investors will also focus on monthly Industrial Production data for July. Production is seen expanding by 0.3%, swinging from a 0.5% contraction in June.
Monthly Building Permits edge up 0.1% while Housing rose 3.9% in July, outperformed expectations.

Technical Analysis: Gold price turns volatile $1,900

Gold price struggles to maintain auction above the immediate support of $1,900. The precious metal continues to face selling pressure due to strength in the US Dollar and Treasury yields. The yellow metal continues its downside journey after a bearish crossover from the 20- and 50-day Exponential Moving Averages (EMAs). Gold price hovers around the 200-EMA and a confident breakdown below this level will expose it to more downside.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

Author

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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